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I found myself once again playing with my fundamental back-tester running a series of favorite investing strategies to see how they performed over the past couple of years. One strategy came out as being particularly strong when buying and holding for short or long periods of time. The strategy is based on strong expected EPS growth and rising sales. These 16 stocks made the cut for current and actionable buys.

The Upgrading Growth Strategy

Oddly enough, the strategy is not particularly complex. You look for stocks, small-cap and under, with high earnings growth expectations over the next few 3-5 years, upgrades in sales looking a couple years down the road, and you choose from the top 15 industry groups as related to forward P/E ratios (instead of individual stock forward P/E ratios).

It is a simple mix of industry groups, revenue upgrades, and high earnings expectations in small stocks.

Historical Back-testing and Robustness

What stood out to me with this simple scan was how well it performed over the past two years across a variety of holding periods.

I will outline below how using a 24 week holding period ran 12 different times (different starting points) for robustness had an average win ratio of 84% and an average compounded annual growth rate of 31.6% vs. the market of 23.2%. The average maximum draw-down was negative 3.9% and the average losing period (over 24 weeks) was 3.7%, while the average winning period was 17.8%.

Back-testing the Strategy over 2 Years and 12 Different Starting Points

While excess gains are noted in longer and shorter periods, I prefer the mix of fewer transactions and less volatility when holding for 24 weeks vs. three months or four weeks. Holding for 52 weeks is less reliable since I only have two years worth of data.

Current Scanned Stocks

Click to enlarge

Upgraded Revenue Growth and High Earnings

A Few Oddities

As these are small stocks, it is no surprise that there is a high component of insider ownership. But I think it is worth noting the mix of high insider ownership and institutional ownership. Informed investors feel these stocks are worth owning. Of course, a smaller amount of shares makes it easier to own a larger percentage.

*Data below is supplied by FINVIZ and may differ for other sites

Ticker

Market Cap

Insider Ownership

Institutional Ownership

MakeMyTrip (NASDAQ:MMYT)

787.38

68.11%

26.40%

SodaStream (NASDAQ:SODA)

1120.17

60.38%

28.80%

Yuhe Intl (OTCPK:YUII)

103.27

39.32%

40.88%

KIT Digital (OTC:KITD)

480.48

25.24%

67.69%

Heritage Crystal Clean (NASDAQ:HCCI)

246.2

18.63%

28.81%

ZAGG (NASDAQ:ZAGG)

244.56

18.55%

51.48%

SPS (NASDAQ:SPSC)

196.94

15.42%

94.10%

LJ Intl (NASDAQ:JADE)

112.81

10.82%

4.77%

Tower Group (NASDAQ:TWGP)

993.99

8.98%

96.30%

Targa (NYSE:TRGP)

1456.84

5.45%

80.33%

NACCO (NYSE:NC)

787.82

2.43%

68.98%

Questcor (NASDAQ:QCOR)

1397.67

0.90%

100.00%

Align Tech (NASDAQ:ALGN)

1898.81

0.67%

82.25%

Echo Global (NASDAQ:ECHO)

324.65

0.58%

48.63%

Noranda (NYSE:NOR)

986.41

0.43%

90.43%

Charm Comm (NASDAQ:CHRM)

467.33

22.95%

Also worth noting is how little debt these companies carry, with a couple exceptions such as TRGP and NOR.

If you are nervous of China stocks right now, then be conscious of CHRM and YUII. JADE is a Hong Kong stock repeatedly bouncing off of its $3.50 support. I’m also a bit skeptical of the India-based MMYT. I’m not denying its growth, but running an internet based travel site is not at the top of my sustainable stock list.

Buying Growth

I like growth, particularly when estimates are raised for the distant future showing that analysts are looking farther away than the immediate quarter. Many of these smaller stocks have high potential for continued growth. As well, this strategy of buying high growth stocks with revenue upgrades in specific industries is a particularly robust strategy across many different holding periods.

Just be careful when the market cycle turns sour as small stocks with high growth are often the quickest droppers.

Source: 16 Stocks Building Steam on Upgraded Sales, Strong Earnings Growth